A recent tax amendment would affect, from a reporting perspective, the current standing of a number of off-shore structures held by Mexican residents. The amendment to the Mexican Administrative Guidelines (“Miscelanea Fiscal”), in force as of July 15, 2016, is triggered by what is being discussed among countries on tax transparency and in particular, by:
- the conclusions reached at the 2016 London Anti-Corruption Summit where the need and mechanisms to identify the beneficial ownership of off-shore investments were discussed,
- the Panama Papers phenomenon, and
- the Mexican authorities concern of the US not participating in the exchange of tax information through the Common Reporting Standard.
As such, within the context of the current international environment fostering the transparency of international transactions to prevent tax evasion, corruption and money laundering, the Mexican tax authorities have taken one more step towards the disclosure of investments made abroad by Mexican residents by eliminating, as of July 15, 2016, the no-reporting exception available through the Administrative Tax Guidelines for:
- direct and indirect investments maintained in blacklisted jurisdictions that have in force a Tax Information Exchange Agreement with Mexico; and
- investments carried out in any jurisdiction through fiscally transparent entities.
This amendment requires Mexican residents maintaining during 2016 any kind of off-shore investment in blacklisted jurisdictions or through fiscally transparent entities to report their participation in these structures by filing the informative return on February 2017. Mexican residents are required to file this informative return, regardless of whether they retain or have relinquished control over the off-shore investment and does not automatically trigger the application of the Preferential Tax Regime Rules (PTR) regarding the income inclusion on accrual basis.
Which exceptions have been repealed as of July 15, 2016?
The Mexican Administrative Guidelines included some relevant exception rules regarding the application of PTR, mainly those related to the filing of annual informative returns in connection with non-PTR income derived by residents from offshore investments, either in black listed jurisdictions or through fiscally transparent entities.
The two exceptions that applied in connection with Article 178 (2) of the Mexican Income Tax Law (MITL) were as follows:
1. Investment located in a country with a recognized Tax Information Exchange Agreement (TIEA) despite its black listed status
The second paragraph of Rule 3.19.11. established that, for purposes of Article 178 (2) of the MITL and in connection with the black list contained under Transitory provision XLII of the 2014 MITL, taxpayers deriving non-PTR income from the expressly listed jurisdictions under Rule 2.1.2. as of the dates specified therein, may not file the annual informative return set forth under Article 178(2) of the MITL. Thus, Mexican taxpayers with investments located in any country having a TIEA in force with Mexico recognized under Rule 2.1.2. were exempted from complying with the obligation to file annual informative returns –established under Article 178 (2) of the MITL- provided that their investments are not deemed subject to a PTR per se.
2. Indirect Investments in Blacklisted Jurisdictions
According to the former Rule 3.19.9, indirect investments made by Mexican taxpayers in blacklisted jurisdictions through entities located in non-blacklisted countries were not subject to the reporting requirements mentioned in Article 178 (2) of the MITL.
3. Fiscally Transparent Entities with Lack of Effective Control and TIEA in place
Under Rule 3.19.9., Mexican taxpayers that derive income through fiscally transparent entities incorporated in a jurisdiction with a TIEA in effect with Mexico, were not liable to file annual informative returns, provided that no effective control existed over the investment and to the extent that such TIEA is duly recognized as such under Rule 2.1.2.